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Fed considers raising interest rates to combat inflation

ACCORDING to Federal Reserve Chairman Jerome Powell, who spoke at the Wall Street Journal Future of Everything Festival on Tuesday, if inflation continues to rise, the Federal Open Market Committee may need to act more aggressively later in the year, pushing the federal funds rate past long-term neutral rates.

Powell said the FOMC “will not hesitate” to take whatever steps are necessary to reduce inflation, including speeding up rate hikes or going above the neutral rate, though he cautioned that the definition of “neutral” varies.

Base on the most recent FOMC poll, participants estimated the neutral rate to be between 2% and 3%, with a median of 2.4 percent, implying that the FOMC may reach neutral by the end of 2022 or mid-2023, depending on the rate hike pace.

Powell indicated that if the economy develops as predicted, a rate hike of 50 basis points will be discussed at the June 14-15 meeting, reflecting his prior remarks and those of other Fed officials in recent weeks. Powell stated that the FOMC is removing accommodation at the fastest rate in decades.

Markets are more anxious about what happens next, and Powell said it’s difficult to give too much forward guidance given the uncertainty of both global events and how rapidly inflation will fall.

Powell said the FOMC needs to “keep pushing ahead” with rate hikes, accelerating or slowing the pace as conditions change, with decisions made meeting by meeting.

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